A Quick Overview of the Current State of DeFi Development

I found it very interesting to see an article on PANews that translated the current state of DeFi development, so I will summarize the current situation of DeFi based on that article, with the citation at the end.

First, let me share my viewpoint: decentralized finance (DeFi) is the mainstream of future finance. Although the current market is still dominated by centralized exchanges (CEX), this is an inevitable part of the growth process of DeFi. In the future, decentralized trading platforms will become the primary tools used by people in their daily lives, while CEX will continue to exist as a supplement.

The rise of a decentralized phenomenon often requires some kind of "evil force" to survive and find attachment in the early stages. For example, when the internet first introduced image functionality, the highest search volume was not for landscape pictures, but for pornographic content; a significant portion of early Bitcoin transactions also came from gray markets and other illegal trades. However, looking back, these "evil forces" did not define their future. The porn industry still exists on the internet, but it is no longer mainstream; illegal Bitcoin transactions now only account for 3%-5% of the total.

Survive first, then you have the chance to grow.

The original intention of DeFi is to free ourselves from reliance on and trust in financial intermediaries, but in the process of development, it has ironically become dependent on centralized systems. This contradiction may indeed be the price of growth. As Professor Xu Yuan from Peking University said in "Milestones of Currency", traditional finance is the evil dragon, while Bitcoin is the young man who slays the dragon:

"If we compare Bitcoin to a dragon-slaying boy, then this boy has not killed the dragon. On the contrary, the boy's butcher knife is already in the dragon's hands, and even the dragon-slaying boy himself has jumped into the dragon's embrace, without a hint of hesitation."

At least I believe that the current indecision is for the sake of tomorrow's greatness.

Returning to the current state of Defi, the data we often use to measure the strength of Defi is represented by TVL. TVL: Total Value Locked.

Since it is a lock-up, what needs to be locked?

1. Stablecoin Protocol

Stablecoin protocols represented by DAI typically use an over-collateralization mechanism: users lock their crypto assets (such as ETH) in a smart contract as collateral to mint stablecoins pegged to the US dollar (such as DAI) at a certain collateralization ratio. Essentially, this is a form of collateralized lending, where the collateral is also referred to as locking.

2. Decentralized Exchange

In decentralized exchanges, users deposit liquidity funds (such as various coins) for trading and earning transaction fees.

3. Derivative Peace and Leverage Trading Agreement

Traders deposit funds as margin, providing leveraged trading. Here, TVL refers to the assets locked in the margin pool.

4. Staking Agreement

Users stake assets to earn interest or governance tokens. For example, Lido is a protocol of this kind that utilizes the current Ethereum network to maintain network security by locking users' tokens, participating in consensus, and earning rewards. This mechanism helps more users participate in the staking process. Staking is also known as locking.

5. Lending Platform

Depositors like Aave or Compound collateralize their assets to earn interest, while borrowers collateralize assets in exchange for liquidity.

6. Yield Aggregator

Users entrust their assets to the protocol, which helps find the best yield strategies, such as Yearn Finance.

After introducing so much, let's take a look at the chart.

The total locked value (TVL) across the entire network has reached 101.7 billion USD, and the total cryptocurrency market capitalization has reached 3.02 trillion USD, with TVL accounting for 3.37%, which is relatively low in numerical terms. This is mainly because the value of Bitcoin cannot contribute to the TVL.

This is an analysis of the market share of the current cryptocurrency market. The fact that Bitcoin accounts for 63.8% of the market cap actually does little to help the growth of TVL, and the reason for this is structural. On one hand, the Bitcoin blockchain does not support smart contracts; on the other hand, the core assets of DeFi are mostly circulated primarily through ETH, while BTC is held passively. Although Bitcoin does have DeFi, its implementation mainly occurs off-chain or through cross-chain methods. Therefore, this limitation means that the current growth of TVL has a ceiling.

At the same time, the TVL of Aave and Lido has reached 34.5 billion dollars, meaning that over 37% of the Defi TVL is staked ETH in Aave and Lido. Most Defi occurs on Ethereum, proving it is still the most important blockchain.

The market capitalization of stablecoins has reached 236 billion dollars, accounting for over 8.3% of the cryptocurrency market. In this report, the author states:

"Stablecoins account for over 8.3% of the $2.8 trillion cryptocurrency market, more than double that of DeFi. The growth rate of stablecoins continues to outpace DeFi TVL, indicating that they have truly achieved product-market fit."

This comparison is not very meaningful, as the TVL of DeFi also includes the market value of many stablecoins. For example, the TVL of decentralized exchanges requires you to stake a trading pair, such as ETH/USDT, and you need to stake both of these tokens.

"Currently, Ethereum remains the primary participant in DeFi, accounting for 52% of the TVL, but this is a decline from last year's 58.3%. Solana, with an 8% TVL, has become the second largest competitor, but it is still more than 6 times smaller than Ethereum."

"The TVL of lending, cross-chain bridges, and liquid staking is the highest, with a relatively small gap between them, ranging from 42 billion to 37 billion dollars. Last year, liquid staking was far ahead, but the gap has narrowed, and lending and cross-chain bridges have caught up."

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"Most players deposit funds in Lido to earn yields, which may be because most people are confident in ETH as a long-term store of value, and Lido also dominates in liquid staking. Other ETH-based liquid staking protocols, such as ether.fi, also hold a dominant position."

"Sky Lending is the top-ranked low-risk stablecoin choice by TVL, with over $2.5 billion in SUSDS stablecoin holdings and a yield of 4.5%."

"Tether and Circle's respective stablecoins are the largest fee-generating businesses in the crypto space to date. Tether alone generated over $5.8 billion in revenue in the past year."

"Solana's fee ecosystem has grown the fastest over the past year, with Jito, Raydium, and Pump.fun earning huge fees. This is likely mainly due to the significant growth of memecoins on Solana."

"Since last year, Bitcoin's transaction fees have decreased by about half, and with the rise of many other competitors in the fee market, Bitcoin's ranking has dropped from second to 14th place."

The total market capitalization of stablecoins has almost doubled, increasing from last year's $136 billion to the current $235 billion. However, USDT and USDC still dominate, accounting for 62% and 26% respectively, totaling 88% of the entire market.

The largest growth in market share is attributed to Ethena's USDe, which had not been launched a year ago but has now become the third-largest stablecoin, holding a 2% market share.

Sky issued the USDS token, breaking DAI's dominance. However, after merging the market capitalizations of DAI and USDS, Sky holds a 3.5% market share, still making it the third-largest market participant.

USDT, USDC, DAI/USDS, and USDe collectively account for about 93% of the stablecoin market, with a market capitalization exceeding 220 billion dollars.

The dominance of USDT shouldn't be viewed merely by the fact that it only accounts for 62% of the market share, thinking it's just over half; the penetration and channel capabilities of USDT are truly remarkable.

I have a friend who is starting a business in artificial intelligence, and he needs to reward promoters in Africa, who have directly stated that they only want USDT.

The power of channels should not be underestimated. In first-tier cities, you may see a variety of beverage brands emerging one after another, but in small shops in third- and fourth-tier cities, you often only see brands like Wahaha and Nongfu Spring. It is precisely this extensive and deep channel layout that has supported Nongfu Spring's founder Zhong Shanshan and Wahaha's founder Zong Qinghou in repeatedly ascending to the throne of China's richest.

That's all for today, Defi is the trend of the times.